With its price trading at such a high level, you are probably wondering what exactly is Bitcoin about. Today, in The Beginners’ Guide to Bitcoin Investing — you will learn all the whats, hows, risks & reward and a bit of mining on Bit Coin and Cryptocurrency.

What is Bitcoin?

Bitcoin is a virtual, decentralised currency, that can be traded or used over the internet.

Decentralised = Environment where power and functions are distributed away from a central authority

What is a Cryptocurrency?

A cryptocurrency is a currency whose transactions are secured using cryptography. Bitcoin is also the world's first decentralised cryptocurrency.

Fiat currencies are backed up by the country issuing them. If you take a close look at your $2 note or $1 coin, you will notice the words ‘legal tender’. What this means is that these coins or banknotes must be accepted in payment of a debt.

For example, Starbucks is legally bounded to accept my dollar notes in exchange for their coffee. On the other hand, if I insist on paying for my latte with two bananas, they have every right to refuse me my drink.

Bitcoin on the other hand is not backed by any country.

As with all currencies, they function as a means of exchange and a store of value:

Bitcoin as a means of exchange

​You can use them to purchase goods and services just like you will with your physical money. (The actual process is somewhat different but we will come to that in a while).

Bitcoin as a store of value

We can accumulate more bitcoins than we require for now and stash them away in our virtual wallet.

One bitcoin in your virtual wallet remains there until you withdraw or spend it just like your one dollar remains in your bank account remains until you withdraw or spend it.

How is Bitcoin value derived

Governments all over the world intervene in the money markets with one overriding aim – that is to keep their currencies stable.

When supply is more than demand, the Central Bank might step in to mop up excess liquidity from the markets to prevent the currency from rapidly losing value and vice versa.

This stability creates confidence in the minds of consumers and businesses utilising the currency.

Because there is no Central Bank doing the same for Bitcoin, the value of Bitcoin is left entirely to market forces (and speculative activity). Unfortunately, this also causes massive fluctuations in the value of the currency.

How many Bitcoins are there in the world?

The total number of bitcoins will eventually converge to 21 million in the year 2140.

At the point of writing, 16,612,000 Bitcoins are in circulation. The latest number of bitcoins in circulation can be monitored here: Bitcoins in Circulation

Source: blockchain.info

If there is an indefinite amount of a commodity in the world, the value of that commodity would decrease. Rarity creates value. It might help to think of the Fed printing money as devaluing the US dollar.

Hence there must be a cap to the total number of bitcoins in existence, and a pre-determined schedule allows that.

Many other digital currencies are created to overcome the limit in Bitcoin supply. There are 1128 digital currencies now, and Bitcoin makes up 48% of all cryptocurrencies.

5 distinct characteristics of Bitcoin

#1 - Open Source: No one owns or control Bitcoin
Unlike currencies which are controlled by governments, Bitcoin is not owned by anyone. It is decentralised and transactions are verified by users on the Bitcoin network. Importantly, no government has the power to shut down Bitcoin unless they are able to shut down the internet.

#2 - Transparency: a dream come true for law enforcement
When it first hit the market, Bitcoin was pictured as the dream for crooks and drug lords. However, if you understood the mechanism, you will know that it isn’t that easy to use Bitcoin for crime.

Bitcoin is pseudonymous, not anonymous. All bitcoin transactions are logged in a public ledger which anyone can access. For example, blockchain.info broadcasts every transaction.

This is transparent and law enforcers can trace the transactions right back to the day the bitcoin was mined, which can greatly helped them in finding the crooks.

With that being said, it is not easy to link the digital transactions or Bitcoin address directly to an individual.

Do not underestimate this as many big banks and payment companies like Visa and MasterCard make loads of money off transactions every second.

With Bitcoin, you can overcome credit card purchases of 2-3% transaction costs, telegraphic transfer fees and even remittance taxes. Businesses can share the cost savings with consumers and take out the middleman.

And because of low transaction costs, micro-payments are made possible, which further enhances the possibilities for micro-lending and crowd-funding activities.

Without Bitcoin, you would probably incur a transaction cost larger than the amount you wanted to pay. For example, a telegraphic transfer will cost you $35, even if you are transferring $10 to another person stationed overseas. Bitcoin can denominate into 1 satoshi = 0.000 000 01 BTC and hence, mirco-payments are a reality.

#4 - No Personal Data Revealed: No security costs
A Bitcoin transaction requires at least two unique addresses (think of these as bank account numbers) – a payee and a receiver.

There are no personal details being disclosed like your credit card details other than the digital addresses. There is no requirement to store personal data and subsequently install expensive security systems to protect them.

#5 - Digital Property: Not a currency yet
The only issue with Bitcoin is that it is recognised as a commodity or digital property. It is not viewed as a currency even though it has been labelled as such.

We will view it like a commodity instead because:

Limited supply of Bitcoin at 21 million - hence its value will be affected by supply and demand.

Bitcoin is not controlled by anyone.

The price of Bitcoin is too volatile. A currency need to be stable otherwise the users will be fearful that the value can tank any time and lose their wealth.

Countries like Japan and Finland have officially classified Bitcoin as a commodity. Bitcoin can attract capital gain tax in some countries and it attracts GST in Singapore.

What can Bitcoins be used for currently?

The list of merchants accepting bitcoins is growing everyday.

Amazon.com, the granddaddy retailer of the western internet world has recently jumped on the bandwagon and started accepting the virtual currency as payment. Other notable ways to spend your bitcoins in cyberspace include WordPress and eGifter.

Major retailers in the US such as GAP, Sears and JC Penny have also started to accept payment in bitcoins. In Singapore at this moment, we only have a sprinkling of cafes and pubs.

A good compilation of bitcoin merchants in Singapore can be found here.

How to own Bitcoins?​

Anyone can own Bitcoins.

There are basically two ways to accumulate bitcoins. You can mine them by connecting your computer to a network, running it 24/7 and dedicating computing technology to the solving of complex mathematical problems, or you could buy bitcoins with actual money.

We explore these methods in this section:

Bitcoin Mining

Bitcoin Mining is very technical, we will not go in-depth in this guide.

Here’s a quick summary:

Basically, during the mining process, Bitcoin transactions are being encrypted and added to the public ledger (think of it as a public record book).

Miners encrypt the transactions by running the mining software to crack mathematical puzzles. Those who solve the puzzle first will be rewarded with Bitcoins. The more miners, the more secured the transactions.

Why Mine for Bitcoins?

Mining solves the distribution problem for virtual currencies. Unlike physical currencies where there is a central authority to print and distribute, there is no way to answer the – “who gets the money?” question for Bitcoin.

Mining presents the most elegant solution by demanding and subsequently rewarding, effort. Miners help encrypt and keep the transactions secured, and thus are rewarded with Bitcoins.

How does one mine a virtual currency like Bitcoin?

Miners are rewarded for their efforts with blocks of bitcoins after their solutions are submitted to the Bitcoin network. At this moment, one block is worth 12.5 bitcoins and that number will halve approximately every four years.

Misconceptions on Bitcoin Mining

We've noticed 2 major misconceptions on bitcoin mining from the public:

#1 - Bitcoin Exchange

Buyers and sellers come together and the exchange matches the best prices for both and facilitates the transaction, taking a small commission in the process.

This is the one of the most common way of purchasing bitcoins.

What you need before you buy your first Bitcoin in Singapore via bitcoin exchanges:

Wallet - to store your Bitcoins and Cryptocurrency

Bitcoin Wallet in Singapore

Before you can even buy bitcoins, you need a way to store them. The Bitcoin/Cryptocurrency community has aptly named these services as ‘wallet’.

To access your wallet, you will need to own a unique address that looks like that:

Source: Github

Think of it as your email address or even as a P.O box by which others are able to send bitcoins to.

Opening an account is simple, just drop by a virtual wallet site and follow the instructions.
There are many Bitcoin wallets available. Coinbase (US) and Blockchain.info (Luxembourg) are some of the pioneers.

If you prefer to go with a Bitcoin Wallet services in Singapore, Coinhako and Luno are some examples. You can also check out this comparison across Singapore’s cryptocurrency exchanges: Bitcoin Exchanges in Singapore

Bitcoin is a virtual currency. There will NOT be any physical coins involved. The only indication that you have owned bitcoins is via your virtual wallet statement.

Exchange / Broker - platform on which you trade Bitcoins and Cryptocurrency

Bitcoin Exchanges in Singapore

To set up an account, you would need to complete a verification process that typically requires the following:

Identification (Passport, NIRC or Driving License)

Proof of address

Once you are verified, the buying and selling is actually quite simple.

​Before you purchase Bitcoins (or any cryptocurrency) from exchanges, read the section on: The case against Bitcoin Exchange

#2 - Third Party Broker

You could also choose to purchase bitcoins through a third party broker.

These are less commonly preferred as most people are able to purchase bitcoins from Bitcoin Exchanges directly.

Coinrepublic used to be a prolific third party broker for Bitcoins in Singapore. However, they had been acquired by a Mexican company and no longer looks to be active.

#3 - Bitcoin ATMs

The first Bitcoin 2 way ATM, known as RoboCoin were installed in 2014. Although they no longer seem to be around.

The Bitcoin ATM works in the same way as our usual bank ATM. You can deposit cash and convert it into Bitcoin, and withdraw cash by converting your Bitcoin to SGD.

Currently, there are 2 Bitcoin ATMs available in Singapore under Bitcoin Exchange:

532 Upper Cross St., #03-11, Hong Lim Complex, Singapore 050531

Tiong Bahru Plaza Level 1, 302 Tiong Bahru Road

The exchange rate of Bitcoin will be reflected at the ATMs. Do note that there would be a premium. Think of it as the Bid/Ask spread.

Case against Bitcoin Exchanges

The key draw of Bitcoin and Blockchain is the concept of being decentralised. In this light, many would argue that storing and buying your Bitcoins through a broker defeats the purpose.

Because by using an exchange, you are allowing your Bitcoins to be centralised at the exchange.​

We asked Chris Long, our trainer at the free Cryptocurrency Masterclass for his opinion on purchasing and storing your cryptocurrency via an exchange:

"If you are investing a small amount, say $500, investing via an exchange makes sense because it is so convenient. However, if you are investing more and want complete control of your Bitcoin, avoid the exchanges. Use a hardware wallet for peace of mind."

Bitcoin Investing

Since its rapid rise from $100 to the $1,000+ levels, Bitcoins have started to pique the interest of traders across the globe.

Those who have bought early were glad that they did. Those who just discovered it are left wondering if it still holds any potential.

We explore Bitcoin Investing in this section.

But, first up let’s take a look at what everyone’s favourite investor thinks about it:

Money Laundering​One of the potential problems is for Bitcoins to be used for money laundering. Speculators have also targeted the Bitcoin, causing the price to fluctuate wildly.

Bitcoin wallets and exchanges have also been unstable and subject to hackers, the most famous one being the Mt Gox exchange which went bankrupt after coins disappeared.

ICOs​One of the concerns raised in MAS’ press release, is the use of ICOs in money laundering and terrorist financing due to the anonymous nature of cryptocurrencies.

Volatility​​As a relatively new concept and investment tool, Bitcoins and cryptocurrencies in Singapore are still highly speculative.

Prices are highly volatile and is vulnerable to changes in the economy, countries policies against cryptocurrencies and much more.

As an investor, you will need to be able to stomach the volatility and risks. You should do your own due diligence and practice sound capital allocation.

ScamsAs Bitcoins and Cryptocurrencies gain popularity for its rapid growth, we may see scams targeting the less informed appearing.

It is important to understand how Bitcoins and cryptocurrencies work, in order to avoid being a victim.

The Future of Bitcoins?

With both sides of the argument presented to you above, we move on to look at the potential future of Bitcoins in our current economy.

Would it be a viable investment tool for investors? Would it really be able to become the currency of the future? And, how else can investors manage Bitcoins in their portfolio?

Bitcoin As An Investment Tool

Bitcoin and cryptocurrency have gained traction this year. We’ve seen them scaling new heights as investors were bullish on its development.

As an investment, Bitcoin may not be as ‘undervalued’ as it was back in 2016.
As a currency, it is still unstable due to its extreme volatility.
As a trading tool, it seem to have just picked up interest amongst traders.

Trading platforms like IG and Thinkorswim have started to allow traders to trade Bitcoins through CFDs and Options too.

As with any investment, you will need to understand the vehicle that you are investing in, and know the risks that you are taking.

So...should I buy bitcoins now?

As a replacement to physical currencies, Bitcoin does have some way to go. Although certain merchants have already started to accept Bitcoin payments, they are still rarely used, and usually on used on an experimental basis.

As mentioned above, Bitcoin prices have been extremely volatile. This hardly gives anybody the confidence to use it as a currency.

It will be a long while before virtual currencies will become accepted in kopitiams, supermarkets and for MRT rides. Most merchants are accepting Bitcoins in pursuit of the novelty factor in marketing their brand.

Early adopters might want to purchase some Bitcoins and learn along the way.

As an investment, investors should put in a few more hours of work to understand the Bitcoin and cryptocurrency situation before deciding if they should be investing in it.

Bitcoin As an Alternative Currency or Asset Class

Bitcoin is very novel and there are more skeptics than supporters for it.

It reminds us of the Innovation Adoption Cycle. There will always be a resistance to adopt new technologies and most products fail if they cannot get the early majority to buy.

Bitcoin is probably still at the Early Adopters stage and if it is able to ‘cross the chasm‘, Bitcoin will be here to stay and no one will be able to refute but live with it. But no one know for sure now.

For most alternative assets, price appreciation comes from inflation. Inflation for commodities can be due to rising population, rising costs of producing the commodity, etc.

Likewise, the costs of ‘mining’ Bitcoins are becoming more expensive over time and the supply which is limited could help to support a base price. As more and more people embrace the technology, it could help to increase demand as well.

Bitcoin as a replacement of Gold in Permanent Portfolio

Bitcoin is similar to Gold in the following ways:

The value in Bitcoin and Gold are perceptive. Humans attached a value to them otherwise they are worthless. They become more precious when more people acknowledge their value.

You need to mine Bitcoin and Gold. The difference is that one is digital and the latter is physical.

They are both limited in quantity.

Symbols of mistrust of authority. Gold is a safe haven when bad things such as political and currency instability happen. Similarly, Bitcoin is attractive because of the non-interference from governments.

Permanent portfolio investors may be wondering if Bitcoin is viable as a replacement to Gold.

We explore the pros and cons here.

Role of Gold in Permanent Portfolio

The role of Gold in Permanent Portfolio is to hedge against inflation. Gold price is expected to rise during inflationary economic condition.

However, there is an additional role of Gold which most people overlook.

In the worst case scenario where your country goes to war, physical gold is the only asset class of value which you can bring along. Stocks and bonds would likely be custodized and the exchange may not even be opened for you to cash out.

Even if you are able to cash out, you would expect to sell the securities at rock bottom prices due to the outbreak of war. Even the currency value would tank too, holding cash would erode your wealth in reality. Regardless how many properties you have in the war zone, they would not worth much and you cannot bring them along.

It would be handy at this point to have gold coins and small bars which are portable. And they would be able to preserve your wealth while the war wages. If you ask me, you can only trust Gold in the most dire situation. It is not the perfect asset class, but it is your best bet.

Advantage of using Bitcoins in Permanent Portfolio

Bitcoin is not bounded by country. You just need to hold dear to a private key to your Bitcoin wallet and you can access your funds with any IT device connected to the internet.

There are many ways to secure this key. You can totally remove from the internet and cold storage the number in physical form. No hackers would be able to steal your key online.

In times of war, you would not need to worry so much as Bitcoin is always there and should be able to hold value while other asset classes devalue. You can also move on to any parts of the world and still have your bitcoins.

Hence, Bitcoin fulfills the role of Gold in this aspect. In fact, Bitcoin does it better. You need not lug along kilograms of Gold while you travel.

Risk of using Bitcoin in Permanent Portfolio

We are unsure how Bitcoin would perform in an inflationary period. Can Bitcoin hedge against inflation?

Theoretically it should perform well in inflationary period as most people would want to convert cash into other forms of assets. But, this remains unproven in reality.

Brief History of Bitcoin

Till today, little has been confirmed about the identity of Satoshi Nakamoto. Countries and companies are curious about Satoshi's identity because he is known to own 1 million Bitcoins in his wallet. With the growth of Bitcoin's value, Satoshi's wealth could make a difference in today's economy.

Alternative Cyptocurrencies

As mentioned above, many other digital currencies have been created to overcome the limit in Bitcoin supply. These digital currencies are also known as ‘altcoins’.

Altcoins: alternative currencies to Bitcoin

One of the more prominent altcoin is Ethereum, due to its wider range of application.

Frequently Asked Questions

Is Bitcoin legal in Singapore?

Some countries such as China have stated outright that companies are not allowed to accept payment in Bitcoin and buying and selling of the currency is illegal.

Monetary Authority of Singapore has taken a progressive approach to the entire Bitcoin issue. Rather than outright stating that Bitcoin is illegal, they have sounded a cautionary note about the currency, leaving the onus to be on the user himself.

MAS has started to take a clearer, regulatory approach towards cryptocurrency, stating that:

“the offer or issue of digital tokens in Singapore will be regulated by MAS if the digital tokens constitute products regulated under the Securities and Futures Act (Cap. 289) (SFA)”

You can read the entire press release from 1st Aug 2017 via the MAS’ website.

For more background on the pros and cons of Bitcoin adoption in Singapore, read these two articles here and here.

How does Bitcoin compare with physical currencies?

Bitcoin is a virtual currency. The concept of virtual currency is still very novel. While they share the same functions as physical currencies, many aspects are radically different. Hence we cannot measure Bitcoin with the same yardstick used on physical currencies.

Traditional currencies are backed by Governments and nations (or a group of nations in the case of the Euro). The strength and stability and security is tied to that of the host nation. A virtual currency like Bitcoin bypasses this issue altogether.

Proponents of Bitcoin state that transactions are free, anonymous and instantaneous, qualities that no doubt make Bitcoin the next big thing provided it conquers the security issues it is facing right now.

Would Bitcoin be adopted worldwide in the future?

Half the world doesn’t have bank accounts. 80% Indonesians, 65% Indians, 12% Americans and 70% Africans have no bank accounts.

Africa was a special continent immediately went onto mobile communication network without transiting through landlines. Countries like Africa may bypass the bank accounts to Bitcoin. In fact, one third of Kenyans have bitcoins.

Many countries are permissive or investigative towards the adoption of Bitcoin and the number is increasing.

What could greater adoption of Bitcoin lead to?

As the adoption of Bitcoin expands, related services would be provisioned. We have Bitcoin mining companies that are listed such as Digital BTC.

In the future, there may be Bitcoin insurance, Bitcoin debit cards and Bitcoin derivatives products.